A Looming Fiscal Crisis?
THE UPA-2 government, in its last three years in office, had been obsessed with ‘fiscal consolidation’ – a retreat from the limited ‘fiscal stimulus’ announced after the global crisis. The pre-occupation was with bringing down of the fiscal deficit, more so by restricting public expenditure growth instead of stepping uprevenue mobilisation. The change of government in 2014 produced no shift in this basic thrust of the fiscal policy of the central government. However, the Modi government struck lucky on the revenue side – it was able to take advantage of the dramatic fall in international oil prices which began almost at the same time as it assumed office. It raised the excise duties on petroleum, oil and lubricants (POL) products – and the central revenues from these grew rapidly from Rs 77,982 crores in 2013-14 to Rs 2,42,691 crores by 2016-17 – a more than threefold increase. Growth in revenues from excise duties helped marginally improve the central taxes to GDP ratio in 2015-16 and 2016-17, and oil excise duties accounted for almost 75 per cent of this increase. Even after this, the ratio in 2016-17 was well below the high of 11.89 per cent achieved in 2007-08. In 2017-18, however, the picture started changing in an adverse direction, and most of this would have to be considered as self-inflicted damage. As 2018-19, the last full financial year before the general elections enters its third quarter stretch, a big crisis of revenues looms large.
The second half of 2016-17 saw the Modi government announcing the dramatic measure of demonetisation. From mid-2017, international oil prices also started firming up. Around the same time, the government also pushed through without complete preparation the introduction of the Goods and Services Tax (GST). Demonetisation and GST were claimed to be the big reform measures to ensure heightened tax compliance and hitting at the black economy. However, while there is little evidence of any such effect of these – there is ample evidence that they produced a disruptive effect on economic activity which ultimately hurt revenue mobilisation.
Income tax revenues in 2017-18 served as one of the first reality checks for the Modi government. Presenting the union budget for 2017-18 in the background of demonetisation, Finance Minister Arun Jaitley put forward ambitious estimates for income-tax revenue growth in 2017-18. Even while presenting the next budget a year later, with the advantage of actual revenue generation data for nearly 10 months being available, he stuck to the original figures in the revised estimates for 2017-18. However, by May 2018, when the provisional figures for the full financial year were released by the Controller General of Accounts (CGA), it turned out that actual income-tax revenues were over Rs 33,000 crores short of the revised estimates and as a ratio of GDP almost the same as the previous year. In the current financial year, data for the April-October period shows a revenue growth of just about 16 per cent over the same period in the previous year. The union budget for 2018-19 had, however, estimated an almost 20 per cent growth of income tax revenues over the inflated revised estimates – in relation to the actuals, meeting the target set by the budget estimates would need more than 29 per cent increase! Clearly, therefore, income tax revenues are likely to fall way short even in 2018-19 – but this may not be confirmed till the elections are over, given past experience of how revised estimates are window dressed!
The CGA release of full year data had also shown that excise duty collections in 2017-18 were another Rs 18,000 crores below the revised estimates. This was despite the fact that the Modi government had not reversed significantly the excise duty increases on POL products and passed on most of the increase in prices to consumers. To this was added the impact of GST introduction – which had an adverse effect on indirect tax revenues. If we exclude the GST compensation cess (levied temporarily to finance the compensating of state governments for the loss of their revenues), the combined revenues from customs, excise, service tax and GST in 2017-18 were 5.07 per cent of GDP, while the revenues from the first three heads had been 5.65 per cent of GDP in 2016-17. GST collections even in 2018-19 have been so far below ‘expectations’. As far as central government revenues from all indirect taxes are concerned, the figures of collections for the April-October period are quite startling – they are actually lower than the revenues received over the same period last year. If we leave out the GST compensation cess, the decline is nearly 7 per cent! Net GST revenues are prone to significant month to month fluctuations and the eventual collections might not be as poor as appears to be the case in the first seven months. However, with less than half the year remaining, the signs are certainly ominous.
The overall position for the April-October 2018-19 period is that the central government’s total tax revenues have grown by less than 7 per cent over the same period last year – and stands at just 44 per cent of the budget estimates. Excluding the GST compensation cess, the increase is well below 4 per cent. The revenue to GDP ratio thus looks destined to decline for the second successive year and therefore the only way the Modi government can achieve the fiscal deficit target is by restraining expenditure too. Since the expenditure in April-October is already well above half the budget estimates, and the fiscal deficit is already larger than budgeted, this would mean that expenditures in the remaining part of the year have to be below revenue mobilisation. This may not be an enviable position for a government to be in as it heads into an election. However, the Modi government deserves no sympathy in this regard. Demonetisation was its own folly as was the rushed introduction of GST – and it still is in denial of their actual consequences if not claiming them as achievements. The choice of not taxing the rich and the corporate sector more heavily is a reflection of its extreme class bias. The commitment to keeping the fiscal deficit within an arbitrary limit is also because the government chooses to be the prisoner of international finance and ratings agencies – there is no valid economic logic to it. Indeed, the economic situation characterised by agrarian distress, joblessness, widespread poverty, poor social services, investment stagnation and such realities require that government step up spending. However, for that to happen you need a government strongly committed to the people rather than to the interests of private profiteering.